Markets & Finance

S&P Picks and Pans: eBay, Merck, Delta, Dow Chemical, LUV

December 04, 2007

Analyst opinions on stocks making headlines Tuesday

S&P REITERATES STRONG BUY OPINION ON SHARES OF EBAY INC.

From Standard & Poor's Equity Research

EBAY; $33.23

According to unconfirmed reports from sources, including AP, Reuters, and the Wall Street Journal, eBay is "returning" to the Japanese online auction market as the company strikes an agreement with Yahoo Japan, which is minority-owned by Yahoo (YHOO). The deal will facilitate cross-border trading. For example, Yahoo Japan users will be able to bid on eBay items by March, and eBay users will be able to bid on Yahoo Japan items by mid-2008. We think this relationship is a positive for eBay and Yahoo, and could be expanded to include other Japan-focused offerings, such as payments. /S. Kessler

S&P REITERATES STRONG BUY OPINION ON MERCK SHARES

MRK; $56.87

Merck keeps non-GAAP 2007 EPS guidance of $3.08-$3.14, and $3.28-$3.38 for 2008. Merck's 2008 forecast misses our $3.40 view, with projected gains in vaccines and other lines below our projection. However, the company reaffirmed double-digit EPS growth over the 2005-10 period. We believe Merck has one of the strongest R&D engines in its industry, with new drugs for atherosclerosis and obesity planned for 2008. We expect to hear more about the company's pipeline at a Dec. 11 meeting. We are keeping our 12-month target price at $64, based on forward P/E and discounted cash-flow (DCF) assumptions. The dividend yield is 2.6%. /H. Saftlas

S&P REITERATES HOLD OPINION ON SHARES OF DELTA AIR LINES

DAL; $18.90

Delta says it expects a fourth-quarter operating margin between zero and negative 2%, compared to an earlier forecast of positive 3%, due to higher fuel prices. As a result, Delta is reducing domestic capacity, which is expected to fall 4%-5% next year while international capacity is likely to grow 15%. We think domestic capacity cuts are prudent and, along with slowing domestic growth at other airlines, are likely to support increased pricing in 2008. We are cutting our 2008 EPS estimate to $1.50 from $1.70, and our 12-month target price to $20 from $23, 13X our new 2008 estimate; above peers. /J. Corridore

S&P REITERATES BUY OPINION ON SHARES OF SOUTHWEST AIRLINES

LUV; $13.74

Southwest is slowing its plan for capacity growth in 2008 to 4%-5%, compared to its prior 8% growth target. Southwest cites high oil prices and slowing economic growth, which it says will "inevitably affect passenger demand". We think slowing growth by Southwest and many competitors domestically should allow for continued progress on pricing. Also, Southwest is best protected among peers by fuel hedges. We remain positive on Southwest's new revenue-generating initiatives, which we think will help it outperform the industry in domestic unit revenue growth in 2008. We are keeping our target price at $22. /J. Corridore

S&P MAINTAINS HOLD OPINION ON SHARES OF DOW CHEMICAL

DOW; $41.18

Dow's decision to close several businesses and plants seems to be based more on a reflection of specific issues rather than any broader industry situation. Dow will exit its automotive sealer business, close two Brazilian plants and close a polypropylene facility where it is a relatively small producer. The company will post a pretax charge of up to $600 million in the fourth quarter, and these actions are expected to realize annual savings of about $180 million. We are keeping our EPS estimates at $3.75 for 2007 and $4.25 for 2008, based on price momentum in plastics and despite possible higher feedstock costs. /R. O'Reilly, CFA

S&P DOWNGRADES OPINION ON SHARES OF JACOBS ENGINEEERING TO HOLD FROM STRONG BUY

JEC; $86.20

Based mainly on our valuation metrics, we now view Jacobs shares as fairly valued. We still expect robust revenue growth and new bookings for energy and refining, oil & gas, and infrastructure projects into fiscal 2009 (Sept.), with costs well controlled. We see a gradual mix shift toward the lower-margin construction phase, but we believe Jacobs is well positioned to grow both organically and from selective acquisitions. After blending our DCF and relative metrics, we apply an above-peer average P/E of 32X to our $3.05 fiscal 2008 estimate, and reduce our 12-month target price by $8 to $98. /S. Scharf